Starbucks Loses Ground

The announcement that coffee giant Starbucks plans to close 600 stores — 500 more than CEO Howard Schultz had talked about earlier this year — is unwelcome news for frappuccino lovers, but it's likely to upset real estate owners and investors even more.

For years, Starbucks has served as a mini-anchor for neighborhood and community centers. The presence of a Starbucks could turn an otherwise ordinary center into a preferred investment vehicle for many buyers because of the coffee giant's ability to pay premium rents and generate heavy foot traffic. As recently as 2007, Starbucks-anchored properties garnered cap rates up to 100 basis points below the national average.

“If you were to lose a Starbucks, it would be significant, because they pay premium rents in most markets and it's going to be hard to replace those rents,” says Bernie Haddigan, national director of the retail group with the national brokerage firm Marcus & Millichap Real Estate Investment Services. The chain often pays 30 percent to 40 percent above the market average in net rent. To find another anchor willing to pay the same amount in the current real estate market would prove difficult.

The chain's July 1 announcement that it plans to close 600 U.S. stores came after a disappointing second quarter. The closings represent only 8 percent of Starbucks's 7,257 company-operated U.S. stores and 5 percent of its total 11,434 U.S. stores, according to Morningstar analyst John Owens. In addition, the chain will limit its new store openings in the U.S. to fewer than 200 this year. Previously, it planned to open about 250 new locations a year through 2011.

“It's not like my phone has been ringing off the hook with people saying they don't want to buy those properties, but it's not good,” says Chad Firsel, executive vice president with NAI Hiffman, an Oakbrook Terrace, Ill.-based commercial real estate services firm. Firsel estimates that in view of the store closure announcement, cap rates on Starbucks-anchored centers will rise anywhere from 75 basis points to 100 basis points, to a range of 7.25 percent to 7.5 percent.